IF THE election campaign to take place over the coming weeks is to be dominated by economic issues, the strength (or weakness) of the economy in the months and years ahead will determine the fate of the government that emerges, regardless of which parties form it. But as the race gets under way, indicators from late 2010 and early 2011 provide little in the way of certainty about economic prospects. While activity has not been detrimentally affected by the shocks of late last year, the economy remains profoundly weak and headwinds will hinder any recovery.
There is, however, some cause for relief in early 2011. The crisis in the euro area has calmed somewhat as market turmoil has eased. Nothing illustrates this better than the euro’s strengthening value. In the three weeks since it reached a post-bailout low, it has appreciated by almost 10 cents against the dollar. Even if the crisis of the currency zone has a very long way to run before the currency’s survival is guaranteed and its weakest constituent economies restored to full health, recent respite has been welcome.
The resilience of one of those weak economies – Ireland’s – is also cause for some comfort. It is now clear beyond any doubt that the extreme uncertainty in the final months of 2010, generated by fears about the banking system and the implications of the EU-IMF bailout, did not have the confidence-shattering effects that it could so easily have had. All available indicators point to an economy that was not pushed off another cliff by the banking and bailout shocks.
That said, those same indicators give no reason to believe that the economy is experiencing the sort of durable recovery needed to generate employment, restore hope and recover lost sovereignty. This week, retail sales figures for December were published. They pointed to further declines in consumer activity, a pattern in evidence since last spring. It is difficult to avoid the conclusion that the same pattern will continue into 2011. With such weakness in the labour market, many more look destined to be touched by job losses and pay reductions. Everyone’s income will be affected by the measures contained in the December Budget, which are only now biting with full force. Consumers look set to rein in spending further.
There are also fresh concerns about the sustainability of the export boom. Although foreign sales of Irish-made goods remained at high levels in the second half of the year, new figures released this weak for November confirm that July marked a peak in the value of goods shipped abroad. Such figures, however, can be highly volatile and may therefore represent one-off factors rather than the beginnings of a trend. One reason to believe that this was the case was the week’s relatively upbeat analysis of prospects for our main export markets by the IMF. But in one case at least, the projections were proved wrong – the UK economy performed much more poorly than the IMF had expected in the final months of 2010. Such is the unpredictability of the times in which we live.